Sofi Technologies (NASDAQ:SOFI) is now in an uptrend. It took a while to find a bottom, but major support near $14 and an upgrade proved sufficient oomph to pull it out of its tailspin. With the path of least resistance now pointing higher, I’m more interested than I’ve been in months for building trades on SOFI stock.
The recent market madness requires some commentary before diving into the details of its price chart and the levels that matter. There’s no denying the backdrop for bullish trades just got trickier.
SOFI Stock and the Messy Market
Don’t let today’s green open fool you. Stocks are still in the thick of a power struggle between long-term bulls and short-term bears. Rallies after distribution days like Tuesday are always suspect. There are too many bag holders overhead waiting to get back to even. Until the overhead supply is cleared out, it’s hard to take the strength seriously. But it’s not just yesterday’s sucker punch that has me cautious; it’s the broken trend structure.
With this week’s whack, the S&P 500 ETF (NYSEARCA:SPY) officially formed a lower pivot high and now sits in a daily downtrend. Furthermore, we’re below the 50-day moving average. That’s my favorite simple indicator for assessing trend direction. Simply put, when we’re above it, I’m bullish; when we’re below it, I’m bearish.
Now, due to the historic levels of monetary and fiscal stimulus in recent years, it hasn’t paid to get overly bearish when stocks fall below the 50-day. As a result, corrections have proven swift and shallow. And this one may prove similar.
But then again, it may not.
Seasonal winds still suggest caution, and October could bring more tricks than treats. Playing defense and focusing on capital preservation is the smarter positioning here. And as it applies to new trades, a discriminating eye is the way to go. Be picky. Pass on mediocre setups. When the market is healthy, you can get bailed out of sloppy entries. Unfortunately, this is not one of those environments.
That said, I think SoFi’s stock does offer one of the more compelling patterns in the market. If I were inclined to buy market weakness, I’d do it in something like Sofi that showed strength on the last advance, not weakness.
SOFI Stock Charts Tell the Rest of the Story
Perhaps the most important takeaway from the weekly time frame of SOFI stock is the significance of support at $14. After its IPO, it initially acted as resistance but quickly turned to support once prices finally vaulted above that level.
We’ve seen multiple tests this year, and buyers have defended their turf every time. If nothing else, this gives us an obvious level to build trades around. Simply put, if SOFI is above $14, you want to be long the stock.
The daily trend had already been trying to bottom, but the high volume breakout on Sept. 22 sealed the deal. The groundswell in participation validated the push and suggests the current dip is a buy. However, bulls’ enthusiasm should be tempered slightly by the terrible performance on Wednesday.
Sofi’s announcement that it was raising $750 million by issuing convertible senior notes weighed heavily on the stock. By day’s end, shares were down 6%, with over 38 million shares changing hands.
Despite the drubbing, SOFI stock is still above the rising 50-day and 20-day moving average. If we can get a reversal candle to form in the next few sessions with an upward move in price to confirm, I like bulls’ chances.
Naked Puts Beckon
Selling puts is my preferred way to play here. The low stock price and high implied volatility make for a tasty payday.
The Trade: Sell the Nov $15 puts for $1.18.
The max gain of $1.18 per contract is yours to keep if SOFI sits above $15 at expiration. To minimize the damage if we’re wrong, exit the trade on a break below $14.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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